Consumer topics

Terms of a contract

Introduction

The rights and obligations of parties to a contract are determined by the terms of that contract. These terms may be express (those articulated by the parties - whether in written or oral form) or implied. Terms might be implied by common law (as a result of conduct of the parties, necessity or normal commercial practice) or by statute.

When assessing contractual terms it is important to keep in mind that both pre-contractual negotiations of the parties and their post-contractual conduct may give rise to non-contractual rights and obligations in addition to, or independently from, the concluded terms of the contract. Most obviously, a false pre-contractual statement will often give rise to liability for contravention of s 18 of the Australian Consumer Law (prohibiting misleading or deceptive conduct)).

Express Terms

Express terms are those terms that the parties have articulated prior to concluding their contract. Sometimes identifying these terms is simple - for example, if they appear in a written contract. On other occasions it is less clear.

Pre-contractual statements

It can sometimes be difficult to classify statements (oral or written) made prior to entering into a contract. A party might be induced to purchase a second hand computer after being told it has had one previous owner and/or was originally manufactured in 2012. What happens if these statements turn out to be false? Did they constitute terms which might give rise to contractual breach or misrepresentations which might provide both contractual and non-contractual remedies or are they of no consequence? Categorisation of these terms is important because it will impact upon the remedies available. Typically, pre-contractual statements are classified as either:

1. Term of a contract
2. Collateral contract
3. Mere representation (as a statement may be both a term and a representation the word 'mere' is used here to refer to representations that are not also terms)
4. Sales puff

Correctly classifying pre-contractual statements is important because the remedies are different in each case:

Term of contract - remedy for breach of contract (contractual damages, equitable remedies)

Collateral contract - remedy for breach of collateral contract (not necessarily the same as for breach of main contract)

Mere representation - no action for breach of contract; may be remedy for common law misrepresentation or broader remedies for breach of s 18 of the Australian Consumer Law.

Sales puff - no remedy

It is possible for pre-contractual statements to fall in more than one category; for example, it is quite common for statements to be classified as both a term of the contract and a representation.

Term of contract

To constitute a term of the contract the parties must have intended it to be promissory in nature. As is the case with determining intention to create legal relations, intention in this context is determined objectively - what would a reasonable person have thought was intended in the circumstances?

Representation

Pre-contractual statements that constitute 'terms' will also constitute representations. In some cases representations are not intended to be promissory and therefore do not constitute contractual terms. However, should they prove false, the party to whom they were directed may have remedies available at common law or, more commonly, under statute. At common law, where a contract was induced by a false representation the representee may be able to rescind the contract. In addition, section 18 of the Australian Consumer Law provides a wide range of remedies for misleading conduct occurring in trade or commerce. The consequences of pre-contractual misrepresentation are discussed in more detail on the misrepresentation page.

Puff

A 'sales puff' refers to exaggerated sales talk. They are not intended by the speaker to be taken literally and a reasonable person would recognise this. As they do not constitute a 'representation' in law or a term, there is no remedy if they turn out to be false.

Terms that are displayed or otherwise delivered

Terms can be considered 'express', even if not discussed by the parties. For example, terms may be incorporated by the exchange of written terms, notice-board displays and tickets. However, to be successfully incorporated into a contract these terms must exchanged or displayed prior to conclusion of the contract and adequate notice of the terms must be given to the other party.

Incorporation of terms by course of dealing

Express terms may be incorporated by a course of prior dealings between the parties. This is only possible if parties have had regular dealings with each other over a reasonable period of time prior to the contract in question; where this is the case the latest contractual terms used may be incorporated despite no specific reference to them.

Misrepresentation

If the party proffering the terms misrepresents their nature or effect prior to signing they will not be able to rely on the misrepresented terms. For example, if one party advises the other that the document does not contain any exclusions of liability, when in fact it does, that party will not be able to rely upon those exclusions, notwithstanding the document was signed.

Mistake (non est factum)

This is a very limited exception and applies only where the signing party can demonstrate that they did not understand the nature of what they were signing (ie, they did not understand it was a contract). The limited scope of this exception is discussed on the mistake page.

Statutory exceptions

A number of statutory exceptions have developed to protect consumers from the effect of the general rule in some cases. These tend to be quite limited in their scope.

Admissibility of extrinsic evidence and the parol evidence rule

General rule

As a general rule, where the terms of an agreement are recorded in writing extrinsic evidence (including 'parol' (oral) evidence) cannot be produced to show that there are other terms or that the terms are different from those that have been recorded.

Exceptions to the general rule

A number of exceptions to the general rule have developed. They include:

Evidence as to the validity of the contract
Extrinsic evidence can be given to show there was no binding contract. For example, to demonstrate the agreement was tainted by fraud or that one of the parties had been operating under mistake affecting the contract's validity

Evidence as to the true nature of the contract
In cases of mistake that would give rise to rectification (for example, a typo in the price or address on a contract), evidence may be given as to the true term. Extrinsic evidence may also be introduced, for example, to show that one party was acting as an agent for an undisclosed principal.

Evidence of other terms
It is very difficult to displace the presumption that a written document does not or was not intended to contain all the terms agreed by the parties. However, evidence may be introduced to demonstrate this was not the intention. For example, the nature of the written document itself might suggest that it was only intending to address in detail one aspect of a broader arrangement. Even where the presumption can be displaced, evidence as to oral terms must not contradict the written part.

Evidence to explain the document
In cases of ambiguity evidence may be given to explain the intended meaning of a term.

Implied Terms

Implied terms are those terms which the law implies into a contract notwithstanding the fact that they have not been discussed by the parties or referred to in a contract. They may be implied at common law or by statute:

Common law

At common law terms are generally implied where it is necessary to give full effect to the intention of the parties. For example, the common law may imply a term requiring parties to do what is necessary to enable the contract to be performed. In some cases courts will ask whether or not the parties would have expressly agreed to the term if they had considered the issue when entering into their contract (ad hoc implied terms). In some cases the courts will imply 'standard' terms without the need for inquiry into the actual intent of the parties (standard implied terms).

Ad hoc implied terms

The common law may imply terms based on the actual or presumed intention of the parties. Such terms may be necessary to give business efficacy to a contract, may result from a course of dealings, or may arise as a result of custom or trade usage. In Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 (AustLII), Justice Mason set out [at para 9] the conditions necessary for implying a term as set out by the majority in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council [1977] HCA 40

'(1) it must be reasonable and equitable;

(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that 'it goes without saying';

(4) it must be capable of clear expression;

(5) it must not contradict any express term of the contract.'

His Honour discussed the basis for the implication of a term as follows (my emphasis):

[para 5] The implication of a term is to be compared, and at the same time contrasted, with rectification of the contract. In each case the problem is caused by a deficiency in the expression of the consensual agreement. A term which should have been included has been omitted. The difference is that with rectification the term which has been omitted and should have been included was actually agreed upon; with implication the term is one which it is presumed that the parties would have agreed upon had they turned their minds to it - it is not a term that they have actually agreed upon. Thus, in the case of the implied term the deficiency in the expression of the consensual agreement is caused by the failure of the parties to direct their minds to a particular eventuality and to make explicit provision for it. Rectification ensures that the contract gives effect to the parties' actual intention; the implication of a term is designed to give effect to the parties' presumed intention.

[para 6] For obvious reasons the courts are slow to imply a term. In many cases, what the parties have actually agreed upon represents the totality of their willingness to agree; each may be prepared to take his chance in relation to an eventuality for which no provision is made. The more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question at issue. And then there is the difficulty of identifying with any degree of certainty the term which the parties would have settled upon had they considered the question.

[para 7] Accordingly, the courts have been at pains to emphasize that it is not enough that it is reasonable to imply a term; it must be necessary to do so to give business efficacy to the contract. ...

[para 8] The basis on which the courts act in implying a term was expressed by MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd (1939) 2 KB 206, at p 227 in terms that have been universally accepted: "Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying. . . " (at p347)

'(1) The existence of a custom or usage that will justify the implication of a term into a contract is a question of fact...

(2) There must be evidence that the custom relied on is so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract ... [citing Thornley v Tilley]:

"(The custom) must be so notorious that everybody in the trade enters into a contract with that usage as an implied term. It must be uniform as well as reasonable, and it must have quite as much certainty as the written contract itself."

...

(3) A term will not be implied into a contract on the basis of custom where it is contrary to the express terms of the agreement ... One explanation of this principle is that, in so far as it relates to written contracts, it is simply an application of the parol evidence rule, by which extrinsic evidence is generally inadmissible to add to, vary or contradict the express terms of a contract which has been reduced to writing ... A more fundamental explanation is that the presumed intention of the parties, on which the importation of the custom rests ... must yield to their actual intention as embodied in the express terms of the contract, regardless of whether the contract is written or oral. ...

(4) A person may be bound by a custom notwithstanding the fact that he had no knowledge of it. Historically the courts approached this question in a rather different way. It was said that, as a general rule, a person who was ignorant of the existence of a custom or usage was not bound by it. To this rule there was a qualification that a person would be presumed to know of the usage if it was of such notoriety that all persons dealing in that sphere could easily ascertain the nature and content of the custom. It would then be reasonable to impute that knowledge to a person, notwithstanding his ignorance of it ... In this way, the issue of notoriety discussed in (2) above came to be co-extensive with the question of imputed knowledge. The achievement of sufficient notoriety was both a necessary and sufficient condition for knowledge of a custom to be attributed to a person who was in fact unaware of it. The result is that in modern times nothing turns on the presence or absence of actual knowledge of the custom; that matter will stand or fall with the resolution of the issue of the degree of notoriety which the custom has achieved. ...

Standard implied terms

In relation to certain categories of contract the common law implies standard terms because they are considered a normal incident of that type of contract. The common law considers certain terms to be a normal incident of implies terms into certain categories of contracts. For example:

in contracts for the sale of goods, an implied term that goods are fit for their intended purpose

in contracts for professional services, an implied term that they will be rendered with reasonable car

The implication of these terms is always subject to the proviso that they will not be implied where the contract evidences a clear intention to the contrary. Thus, for example, if a contract provides that there is no promise given, either expressly or by implication, that the goods will will be fit for any particular purpose, then courts will not imply a term that goods should be fit for purpose.

Statute

Until 1 January 2011 overlapping national and state legislation implied terms into consumer contracts. The Australian Consumer Law now applies nationally. It no longer implies terms into consumer contracts but instead provides statutory guarantees that are very similar to the terms previously implied. Because they are no longer terms implied into a contract they do not give rise to contractual remedies; instead, remedies are incorporated in the Australian Consumer Law.

Note that state and territory legislation may still continue to imply terms into contracts, but those implied terms may be excluded by the parties - consumer guarantees cannot be excluded by the parties. Victoria's statutory implied terms are explained below.

Victoria

In Victoria, the Goods Act implies terms into contracts. These terms may be excluded by the parties. The key provisions are:

Section 61 - Implied terms may be excluded or modified by the parties

Section 17 - Implied term as to title - right to supply

Section 18 - Implied term as to conformity with description

Section 19(1) - Implied term that goods will be fit for purpose made known

Section 19(b) - Implied terms that goods will be of merchantable quality

Section 20 - where sale by sample, implied term that the bulk correspond to the sample